Metcash shares dive most in 9 years on dividend cut

Metcash chief Ian Morrice says the company can no longer rely on cost-cutting to boost margins and profits and plans to reignite sales growth in the food and grocery channel through six growth levers.
Photo: John French

Metcash shareholders have given the thumbs down to a risky turnaround plan that involves cutting dividends to fund almost $700 million of capital investment aimed at securing the ­long-term future of independent ­grocery retailers.

Metcash
shares fell as much as 12 per cent on Friday to their lowest level in nine years after the wholesaler said it would reduce its dividend payout ratio from around 92 per cent in 2013 to 60 per cent. Metcash chief executive
Ian ­Morrice
also warned that earnings per share this year were expected to fall as much as 15 per cent, and earnings in the core food and grocery division would fall again in 2015, as the wholesaler spent about $45 million to reinvigorate sales in the IGA grocery network.

Metcash plans to reduce grocery prices by about 3 per cent to match shelf prices at the major chains and ­encourage retailers to sell more fresh food; offer a more differentiated product range to better suit their customers; and refurbish stores.

“We are putting the success of ­independents front and centre of everything we do – for us to be successful our retailers need to be successful," said Mr Morrice, who took the helm from long-serving chief
Andrew Reitzer
last June.

“We also need to understand the ­consumer as well as our retailers, because if we don’t, we can’t be proactive about how we need to build successful independents."

Push to lift sales

Mr Morrice says Metcash’s current model is no longer working and the wholesaler, which has annual revenues of almost $14 billion, can no longer rely on cutting costs to boost earnings.

Metcash’s food and grocery revenues have plateaued in recent years, forcing the wholesaler to look outside the ­sector for growth. Like-for-like sales growth has fallen from 6.8 per cent ­compound annual growth rate between 2008 and 2011 to 0.5 per cent between 2011 and 2013.

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Weak sales have led to negative ­operating leverage. CAGR earnings grew 10 per cent between 2008 and 2011, but have fallen 3.9 per cent between 2011 and 2013.

“We recognise there’s a need for change," Mr Morrice told analysts in Sydney. “We need to get ourselves back into positive leverage and it’s going to take some time to do that."

Metcash’s medium-term goal was to achieve sales growth at or above market growth. Over time, higher volumes would lead to higher earnings.

Mr Morrice said earnings would be rebased, but in the longer term the plan would restore confidence among ­independent retailers, who have been losing market share, and restore ­investor confidence in Metcash.

Mr Morrice was nonplussed about the share price fall.“Some of the ­decisions we’ve communicated about investment going forward take some understanding and I believe even the analysts who know our stock well – it will take them a day or two to ­understand what this means going ­forward," he said.

Investors Mutual fund manager
Hugh Giddy
said the plan was feasible and should boost sales growth over time, lifting the standard of underperforming stores.

However, Mr Giddy would rather see Metcash cut the dividend payout ratio to 50 per cent and scrap the dividend ­reinvestment plan: “It holds back ­earnings (per share) growth."

Ben Ryan, an IGA retailer and head of the IGA national council, said there was a high level of support among the 1400 IGA store owners who had been briefed on the plan. “Retailers understand and certainly agree there’s a need for change," Mr Ryan said.

The plan involves a significant step up in capital investment over the next five years, funded by a reduction in working capital and a reduction in the dividend payout ratio to 60 per cent, starting with the final dividend this year.

The dividend payout ratio has risen from 65 per cent in 2007 to 92 per cent in 2013.

Capex is estimated to reach $575 million to $675 million over five years. Capex will peak at between $150 million and $180 million in 2015, reducing to $130 million to $150 million in 2016 and 2017.

Investments include:

■ $100 million to $125 million to fund store refurbishments, new stores and store buybacks

■ $160 million to $180 million to fund distribution centre automation

■ $15 million to $20 million on digital technology to create online retail ­platforms

■ $85 million to $130 million on bolt-on opportunities and network growth.

Early signs the strategy is working

Analysts believe the plan will lead to a significant rebase in earnings.

Metcash has, for example, cut prices on 2500 products at 34 pilot stores and is monitoring the impact on sales growth. It has also been culling inventories to make way for new products.

“The implementation of Metcash’s new strategy is weighing on margins as the company invests in price across its price match pilot," Citigroup analyst
Craig Woolford
said after the profit downgrade.

Metcash has also flagged significant one-off costs and asset write-downs, which will further drag down bottom-line results. Metcash expects impairment charges between $30 million and $35 million before tax this year.